Exchange Traded Fund AuM to exceed $5trn by 2020

Professionally managed financial investments globally are predicted to grow at 6 per cent per annum to reach $100 trillion by 2020, according to a new report by PwC. Exchange-traded funds (ETFs) will play a prominent role in this growth, as new investor segments continue to integrate them into their portfolios and fund sponsors continue to introduce more products.

The report, ‘ETF 2020: Preparing for a new horizon’ (ETF 2020), which surveyed executives from 60 ETF sponsors, asset managers and service providers around the world that account for over 70 per cent of global assets, reveals more than three out of four executives expect ETF Assets under Management (AuM) to at least double, to reach $5 trillion or more by 2020.

According to ETF 2020, asset flows in the developed markets of the US and Europe will continue to dominate the ETF landscape. However, the highest rates of growth will be found in the less mature markets.

Institutional investors are widely expected to be the primary growth driver with insurance companies, pension plans and hedge funds, in particular, projected to be significant sources of demand for ETFs.

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New types of indexing (also referred to as “smart beta”) represent a hotbed of product development activity with 46 per cent of firms surveyed identifying this as the most important area of innovation. PwC expects this to continue for the near term. Active ETFs (34%) and alternatives (29%) are also expected to be sources of significant ETF growth between now and 2020.

ETF sponsors are bullish on their financial prospects with 59 per cent saying they expect their ETF business to become more profitable this year.

According to PwC, upgrading technology, resources and processes will be critical as the ETF landscape becomes more global and advanced, with a wider array of investors and new investment strategies offered in ETF form.

ETF 2020 highlights that service providers will need to continue to adapt their business model by adding resources, streamlining processes, introducing more automation, globalising operations and upgrading technology.

The regulatory environment is widely believed by the survey participants to have a significant impact on the growth and innovation of ETFs over the next few years. 91 per cent indicated that regulations and taxes impact ETF growth. PwC notes, however, that while new regulations could spark further growth if they permit further product innovation or lower distribution barriers, they could also dampen demand, particularly if new tax rules make ETFs less tax efficient.